Congress Reviews US Tax Incentives for Energy Technologies

Published on March 15, 2013

On Wednesday, the US House of Representatives Committee on Science, Space, and Technology’s Subcommittee on Energy held a hearing on the United States’ federal financial support for the development and production of fuels and energy technologies.

Energy-related tax incentives, including special deductions on tax rates, tax credits, and cash grants in lieu of tax credits, were historically aimed at increasing fossil fuel production; but beginning in the late 1970s, this focus gradually shifted as tax incentives were added for energy efficiency and renewable energy technologies.

According to the Congressional Budget Office (CBO), energy-related tax incentives averaged approximately $4 billion per year from 2000 to 2005. Since then, however, those costs have risen dramatically to an average of $20 billion a year from 2009 to 2011, before falling back to around $16.5 billion annually in 2012 and 2103, largely due to the expiration of the ethanol tax credit.

Overall, 68% of the energy-related tax incentives in 2011 were directed toward renewable energy technologies, and 10% were dedicated to energy efficiency. While several energy-related tax incentives, such as the production tax credit and the investment tax credit, are targeted to encourage the production of electricity from specific energy technologies such as solar and wind, the majority of tax incentives available for non-electricity fuels are provided to biofuels, followed by natural gas and petroleum liquids.

This year, the CBO has calculated that provisions aimed at energy efficiency and renewable energy account for about three-quarters of the estimated budgetary cost of federal energy-related tax preferences. That mix reflects changes to the tax system made by the American Taxpayer Relief Act of 2012, which was enacted in January of this year to avoid the “fiscal cliff.”

The ATRA extended four major energy tax provisions that had expired at the end of 2011 or were scheduled to expire at the end of 2012, especially the incentives for alcohol fuels, biodiesel and renewable diesel. The CBO has estimated the total cost of those four provisions will be $6.8 billion in 2013.

The CBO also said the mix of energy tax preferences will look quite different in the future, depending on how the energy sector’s tax preferences are affected by the ongoing political discussions on reducing tax deductions and credits to restrain the US fiscal deficit. More…

Under current law, most of the support for energy efficiency and renewable energy comes from provisions that have already expired or are scheduled to expire at the end of 2013. In contrast, most of the support for fossil fuels and nuclear power comes from provisions that are permanent.

Speaking for the CBO, Terry Dinan, a senior advisor in its Microeconomic Studies Division, provided the rationale for government intervention in the energy sector, in that, without it, households and businesses do not have a financial incentive to take into account the environmental damage or other costs associated with their energy production and consumption choices.

While “the most direct and cost-effective method for addressing that problem would be to levy a tax on energy sources that reflects the environmental costs associated with their production and use,” he said, “subsidies (such as tax preferences) for favored technologies can accomplish some of the same goals but in a less cost-effective way.”

Unless the Government intervenes, Dinan commented that the amount of certain types of research and development that the private sector would undertake is likely to be low, particularly for basic research in the early stages of developing a technology.

Mary J. Hutzler, from the Institute for Energy Research, concluded that, despite the huge increases to their tax breaks, “those energy fuels/technologies receiving the largest subsidies are producing the least amount of energy for the nation. And those technologies, some of which have been subsidized for decades, are still a long way from being cost-competitive given the lobbying that their industry associations are doing to continue their subsidization.”